What Banks, Academics, the Media
and Politicians Don't Tell You About Money
by Stephen Zarlenga, American
Progressive Review, http://prorev.com/
Most of what follows is the work
of the extraordinary and admirable Stephen Zarlenga of the American
Monetary Institute. We have taken excerpts from various of his
writings - including a 2003 speech to US Treasury staff - and
blended it into one piece. Also included is an article we ran
1994 by Bob Blain and an excerpt from Sam Smith's Great American
Political Repair Manual, published by WW Norton in 1997.
The money system is society's greatest
dispenser of justice or injustice. A good one functions fairly,
helping create values for life. A bad, unjust one obstructs the
creation of values; gives special privileges to some and disadvantage
to others causing unfair concentrations of wealth and power; leading
to social strife and eventually warfare and a thousand unforeseen
bad consequences - physical and spiritual. . .
One reason economists have failed mankind
so badly is their poor methodology - an over-reliance on theoretical
reasoning. Alexander Del Mar the world's greatest monetary historian
noted: "As a rule economists. . . don't take the trouble
to study the history of money; it is much easier to imagine it
and to deduce the principles of this imaginary knowledge.".
In England the struggle became the goldsmiths
vs the monarchy representing society. Later it was the Bank of
England vs. society. Until then England's money power was in the
monarch's hands. But from that point, Bank of England credits
would be substituted in place of public money. This promoted a
confusion between credit and money to this day. But they are different
things. Credit depends on the creditor remaining solvent. Real
money does not promise to pay something else. Money is on a higher
order than credit.
Those behind the Bank of England obscured
the real source of the bank's power - its legal privilege. Its
notes were accepted in payments to the government. Recovering
the science of money for the private profit of a small group produced
harmful results: 120 years of continuous warfare spawned an unpayable
national debt leading to excessive taxation leading to horrors
like the Irish potato famine.
Before then, when a nation's money system
was used for taxation, the revenue generally aided the society.
But the Bank of England concentrated society's resources in the
wrong hands, crippling the possibility for government to function
properly, leading to a growing contempt of government.
Today it's still the bankers versus the
society. At base, the battle remains private money vs. public
money. The outcome determines whether the money system operates
to serve the few in control, or the whole society. . .
Mankind can live under various forms of
government from dictatorship to republic, but the best systems
are those in harmony with human nature. Likewise many things can
be made into money, but the best will be the ones in harmony with
the nature of money.
Remember: don't confuse money with tangible
wealth. Yes, commodities can be improperly monetized by law. The
result will make the money system hostage to the commodities situation;
hostage to the people, companies, countries that control the commodity.
Ultimately it removes the monetary power from society and places
it into the hands of the wealthy.
And don't confuse money with credit -
either private or public credit. Yes private credits can be improperly
monetized by law. But that gives great privilege to those whose
credits have been monetized, to the detriment of the whole society.
The money system then becomes an engine of injustice - as it is
now. . .
How private central banking started in
First Step: Our Constitutional Convention,
considered two grand themes on humanity: First whether mankind
could be self-governing. This American experiment is still in
doubt because the Convention mishandled the other grand theme
over the nature of money.
They met from May to September 1787 but
the money subject didn't came up til August 16. Jefferson and
Paine weren't there. Franklin was too old to speak.
A curious book on money appeared, written
anonymously by Calvinist clergyman John Witherspoon. The book
attacked government money and promoted Adam Smith's primitive
view that only gold and silver are money. . . .
The power for government to create money,
long considered a necessary part of sovereignty was already in
the articles of Confederation, but the Federalists fought to exclude
this crucial power from the new government, arguing that it could
not be trusted with it. Some of them intended to get hold of the
power privately as had been done in England.
The supreme importance of understanding
the nature of money now becomes evident: For if money obtains
its value from "intrinsic" qualities, it could be viewed
more as a creature of merchants and bankers than of governments.
But if money's essence is an abstract
social institution obtaining value through law, then its a creature
of government and the Constitution had better deal with it adequately.
Describing how a uniform currency is to be provided, controlled
and kept reasonably stable, in a just manner. The Constitutional
Convention faltered on this crucial question.
The delegates accepted Smith's primitive
concept of money and didn't firmly place the money power into
government's hands, leaving it ambiguous.
But the power would still exist. What
I'm suggesting is that human affairs require government to have
four branches, not three; the fourth branch to administer the
The Constitution left the money power
up for grabs. Alexander Hamilton wasted no time in grabbing.
Second Step: The Constitution went into
effect in late 1789. Hamilton's first move as Secretary of the
Treasury, was to assume $15 million of the state debts. . . an
extremely unpopular act. Why?
The worthless debt was held by the revolutionary
soldiers, farmers, manufacturers and merchants who furnished its
supplies. As Congress secretly passed the bill behind closed doors,
the country was overrun by speculators, buying up the certificates
for pennies on the dollar.
Third step: Next Hamilton and associates,
having kept the monetary power out of government, moved to assume
it themselves. . .
Hamilton's Federalists quickly put through
legislation chartering the First Bank of The United States, as
a privately owned central bank on the Bank of England model. The
Bank would be issuing paper notes not really backed by metal,
but pretending to be redeemable in coinage, on the one condition
that not a lot of people asked for redemption. They never had
Thus the real question was whether it
would be private banks or the government that would issue paper
money. Will the immense power and profit of issuing currency go
to the benefit of the whole nation, or to the private bankers?
That's always been the real monetary question in America.
Gold and silver served as a smoke-screen.
What the bankers counted on were the legal considerations of the
money. They knew that all that was needed to give their paper
notes value, was for the government to accept them in payment
for taxes. That, and not issuing too excessive a quantity. Under
those conditions, the paper notes they printed out of thin air,
would be a claim on any wealth existing in the society.
Just where did the money for first bank
of the U.S. came from? . . . The $10 million subscription for
the banks' shares, was oversubscribed within two hours. Only 1/10
of it was ever paid in gold. The rest was accepted in the form
of bonds - the government bonds that Hamilton had turned from
pennies on the dollar to full value. The money for the private
bank actually came from the American people.
Thanks to Jefferson's efforts, the bank
was liquidated in 1811. Three quarters of it was found to be owned
by English and Dutch.
AMI's proposed reforms
- Nationalize the Federal Reserve System.
Reconstitute it in the US Treasury, to evolve into a fourth branch
of government. Only the government would create money.
- Remove the privilege which banks presently
have to create money. This is done through an elegant and gentle
process which automatically turns all the previously issued bank
credit into real American money. 100% reserves are reached not
by calling in loans but by increasing reserves. This would be
neither inflationary or deflationary.
- Institute programs for automatic, constitutionally
determined government money creation, starting with the $2 trillion
which the civil engineers need to bring our infrastructure up
to acceptable levels. From there we go forward carefully determining
how to best run the monetary system. . .
What difference would reconstituting the
money power in government make? Government money goes into infrastructure;
better life; better jobs; education, safer roads, cleaner water;
better health care; social security, etc. Society is empowered
by being able to direct the money power to solve pressing problems
rather than into useless speculation. We no longer have to say
we can't afford it, when so many people and resources are unemployed!.
These three reforms can be closer than
we think; and in a crisis situation if only 5% of the citizenry
has an awareness of the societal/legal nature of money, they could
The need for monetary reform
The power to create money is an awesome
power - at times stronger than the executive, legislative or judicial
powers combined. It's like having a "magic checkbook,"
where checks can't bounce. When controlled privately it can be
used to gain riches, but more importantly it determines the direction
of our society by deciding where the money goes - what gets funded
and what does not. Will it be used to build and repair vital infrastructure
such as levees to protect major cities? Or will it go into warfare
or real estate loans, creating asset price inflation - the real
Thus the money issuing power should never
be alienated from democratically elected government and placed
ambiguously into private hands as it is in America in the Federal
Reserve system today.
Indeed most people would be surprised
to learn that the bulk of our money supply is not created by our
government, but by private banks when they make loans. Most of
our money is issued as interest-bearing debt.
We are borrowing this money system from
private banks when instead we should own the system, not rent
it. Our government has the sovereign power to issue money (Art.1,
Sect.8) and spend it into circulation to promote the general welfare
through the creation and repair of infrastructure, including human
infrastructure - health and education - rather than misusing the
money system for speculation as banking has historically done.
Our lawmakers must now reclaim that power. . .
Unhappily, mankind's experience with private
money creation has undeniably been a long history of fraud, mismanagement
and even villainy. Banking abuses are pervasive and self-evident.
Major companies focus on misusing the money system instead of
production. For example, in June 2005, Citibank and Merrill Lynch
paid over $1.2 Billion to Enron pensioners to settle fraud charges.
Private money creation through fractional
reserve banking fosters an unprecedented concentration of wealth
which destroys the democratic process and ultimately promotes
imperialism. Less than 1% of the population claims ownership of
almost 50% of the wealth, but vital infrastructure is ignored.
The American Society of Civil Engineers gives a D grade to our
infrastructure and estimates that $1.6 trillion is needed to bring
it to acceptable levels.
That fact alone shows the world's dominant
money system to be a major failure crying for reform.
Infrastructure repair would provide quality
employment throughout the nation. There is a pretense that government
must either borrow or tax to get the money for such projects.
But the government can directly create the money needed and spend
it into circulation for such projects, without inflationary results.
The false specter of inflation is usually
raised against suggestions that our government fulfill its responsibility
to furnish the nation's money supply. But that is a knee jerk
reaction - the result of decades, even centuries of propaganda
against government. When one actually examines the monetary record,
it becomes clear that government has a superior record issuing
and controlling money than the private issuers have. Inflation
is avoided because real material wealth has been created in the
From Stephen Zarlenga's 2003 speech at the U.S. Treasury
Perhaps the chief failure of economics
is its inability, from Adam Smith to the present, to define or
discover a concept of money consistent with logic and history.
Economists rarely define money, assuming an understanding of it.
It's still being argued whether the nature of money is a concrete
power, embodied in a commodity like gold; or whether it's a credit/debit
issued by private banks. Does its value come from the material
of which it's made? Or is it, as we have concluded, an abstract
social power - an institution of the law, having value because
its accepted in exchanges due to the sponsorship of government?
The correct answer leads to conclusions on the proper monetary
role of government; whether the power to create and control money
should be lodged, as at present in a somewhat ambiguous private
issuer - the Federal Reserve System and its member banks - or
should be wholly reconstituted within government. An accurate
concept of money will light the way to solving the present fiscal
We have two basic approaches to understanding
money: A theoretical method based on logic; and an empirical approach
based on experience or history. Practitioners of the two methods
arrive at very different conclusions. Theoreticians usually support
private commodity money and private credit money. Historians normally
want a much larger role for government.
Let's start with Aristotle who gave the
culmination of Greek thought and experiment on money around 330
BC: "All goods must therefore be measured by some one thing.
. . now this unit is in truth, demand, which holds all things
together. . . but money has become by convention a sort of representative
of demand; and this is why it has the name nomisma - because it
exists not by nature, but by law (which in Greek was nomos) and
it is in our power to change it and make it useless." So
Aristotle calls money a creature of the law. Not a commodity from
nature but an abstract social institution. Its essence is not
tangible wealth in itself, but a power to obtain wealth.
Plato agreed with Aristotle and advocated
fiat money for his Republic: "The law enjoins that no private
individual shall possess or hoard gold or silver bullion, but
have money only fit for domestic use. . . . wherefore our citizens
should have a money current among themselves but not acceptable
to the rest of mankind. . . " And: "Then they will need
a market place, and a money-token for purposes of exchange."
So both Aristotle and Plato noted the
paramount principle - that the nature of money is a fiat of the
law, an invention or creation of mankind. This principle, part
of a lost science of money, must now be relearned in the Third
Millennium in order to achieve the monetary reforms needed to
move back from the brink of nuclear disaster, to move away from
a future dominated by fraud and ugliness, toward a world of justice
This "private vs. public" battle
for the control of the money power is part of a great ongoing
social battle recurring throughout history to this day. This factor
shapes the most important outcomes determining how well a money
system works. A good system functions fairly; helping the society
create values for living. A bad one obstructs the creation of
values; places special privileges in the hands of some to the
disadvantage of others, and promotes unfair concentrations of
wealth and power, and disharmony and social strife.
Now it may be surprising, but the historical
record actually shows that publicly controlled systems function
much better than private ones. Furthermore, it shows that the
concept of money - how money is defined - usually determines whether
the system will be publicly or privately controlled. . .
Our American experience contains many
of the best case studies for understanding money. We have been
a great monetary laboratory - every conceivable solution was tried
at some time, and we've been a paper money nation from colonial
days. Our development was inseparable from it - without it there'd
be no United States.
English and Dutch laws forbade sending
coinage to the colonies, placing them in continual distress. The
intent was to extract raw materials, not for the colonists to
trade with each other. An early form of globalization. The colonies
had to devise monetary innovations.
In the period 1632 - 92, seventeen different
commodities were monetized by law at specified prices. It didn't
work - everyone wanted to pay with the least desirable commodity,
in the worst condition. . .
Private land banks were set up but were
shunned by the colonists, who considered money a prerogative of
government, as it was in England until 1694.
Then in 1690, four years before the Bank
of England, Massachusetts embarked on a radical course and issued
paper bills of credit, spending them into circulation. Rather
than a promise to pay anything, they were a promise to receive
them back for all payments to the commonwealth. The colony thrived.
Other colonies copied them and infrastructure arose.
In 1723 Pennsylvania's system loaned the
bills into circulation, charging interest on them and using it
to pay colonial expenses. Ben Franklin wrote:
"Experience, more prevalent than
all the logic in the World, has fully convinced us all, that paper
money has been, and is now of the greatest advantages to the country."
. . .
Some long lost principles of the science
of money quickly resurfaced:
- Money need not have intrinsic value;
its nature is more of an abstract legal power than a commodity.
- Accepting the government paper back
in taxes was the key feature needed to give it circulating value.
- The quantity of money in circulation
had to be regulated to maintain its value.
- They observed that paper money helped
build real infrastructure.
- Most importantly, the colonies did not
issue more money than their legislatures authorized. They have
an outstanding record issuing currency. Of over a hundred colonial
issues I found only one case of fraud. In Virginia, a Mr. Robertson
who was supposed to be burning the old notes as new ones were
printed, was giving them to friends instead.
But in the battle for monetary dominance,
the colonial monetary experience has been miscast as irresponsible
inflation money. This was the result of 18th century Boston's
medical Dr. William Douglas' inaccurate writings. The error was
corrected by Alexander Del Mar in 1900 in The History of Money
in America, but was ignored. It was authoritatively cleared up
again by Professor Leslie Brock in 1976 and again ignored. Many
economists, and especially the libertarians, still haven't got
the message that colonial government paper money was crucial in
building the colonies.
In 1764, England's Lords of Trade and
Plantations prohibited all colonial legal tender issues, and that
became the underlying cause of the American Revolution, not some
tax on tea.
The continental currency became the lifeblood
of the revolution. $200 million was authorized and $200 million
issued. The currency functioned well. In late 1776 the notes were
only at a 5% discount against coinage, when General Howe took
over New York City and made it a center for British counterfeiting.
The Brits counterfeited billions; newspaper ads openly offered
the forgeries. . . In March 1778 after 3 years of war, it was
$2.01 Continental for $1 of coinage.
The continentals carried us over 5 1/2
years of Revolution to within 6 months of its final victory. Thomas
Paine wrote: "Every stone in the Bridge, that has carried
us over, seems to have a claim upon our esteem. But this was a
corner stone, and its usefulness cannot be forgotten."
Our constitutional convention considered
two grand themes of humanity: First whether mankind could be self-governing
or had to be ruled by authority. Often referred to as the American
experiment. We are still learning the outcome, and one of the
reasons it's still in doubt is because of the way the convention
mishandled the other grand theme - the nature of money. By the
time of the convention, the great benefits of the continentals
was nearly ignored; along with much of the rest of our hard won
monetary experiences. Some wanted to emphasize that the continentals
became worthless and rejected the idea of paper money altogether.
They ignored that paper money was crucial
in giving us a nation; that abstract money requires an advanced
legal system in place; that the normal method of assuring its
acceptability is to allow the taxes to be paid in it. . .
The convention met from May to September
1787 but the money subject didn't come up until August 16. Remember,
Jefferson and Paine were not there. Franklin was too old to speak.
A curious book on money appeared just
then, written anonymously by Calvinist Minister John Witherspoon,
- the only clergyman signer of the declaration of Independence.
The book attacked government money and promoted Adam Smith's view
that only gold and silver are money. . .
The power for government to properly create
money, long considered as a necessary part of sovereignty, was
contained in five magic words - to emit bills of credit. This
provision was already in the Articles of Confederation, but the
Federalists - the merchant/commercial interest, largely responsible
for calling the Constitutional Convention in order to strengthen
the national government, fought to exclude this monetary power
from the new government, arguing that it could not be trusted
with it. Some of them intended to get hold of the power privately
as had been done in England.
The supreme importance of the concept
of money now becomes evident: For if money is primarily a commodity,
convenient for making trades, which obtains its value out of "intrinsic"
qualities, then it could be viewed more as a creature of merchants
and bankers than of governments.
But if the true nature of money is an
abstract social institution embodied in law - obtaining its value
largely through legal sanctions, then its more a creature of governments,
and the Constitution had better deal with it adequately - describing
how a uniform currency is to be provided, controlled and kept
reasonably stable, in a just manner. It was on this crucial question
that the Constitutional Convention faltered.
The delegates accepted Adam Smith's primitive
commodity definition of money as gold and silver and didn't firmly
place the monetary power into government, leaving it ambiguous.
Later they'd argue over what they had done. But the power would
still exist, since it is as important as the legislative, judicial
and executive powers.
I am suggesting that the nature of human
affairs requires government to have four branches, not three;
the fourth branch to embody and administer the monetary power.
The Constitution trusted the people with
the political power; but didn't firmly place the monetary power
in their government. This (along with slavery) is the original
sin of American politics. As a result the power was left up for
grabs. Alexander Hamilton wasted no time in "grabbing."
The Constitution went into effect in late
1789; Van Buren described Hamilton's first move as Secretary of
the Treasury, in 1790: "Hamilton assumed some $15 million
of the state debts. . . an act. . . neither asked nor desired
by the states, unconstitutional and inexpedient. . . "
What was so bad about it? "A large
proportion of the domestic debt (was held by) the soldiers who
fought our battles, and the farmers, manufacturers and merchants
who furnished supplies for their support. . . .When it became
known to members of Congress, which sat behind closed doors, that
the bill would pass. . . every part of the country was overrun
by speculators, by horse, and boat, buying up large portions of
the certificates for (pennies on the dollar)." Madison, attempted
to have the law pay speculators less than the original holders,
but was voted down.
Next Hamilton and associates, having kept
the monetary power out of government hands, moved to assume it
themselves. The Bank of North America was the only bank in the
US, formed in Pennsylvania on Tom Paine's initiative to assist
the revolution. Arguing that it was only a state bank, Hamilton
suggested it come forward if it wanted to alter itself for the
national purpose. Curiously, the bank took no steps toward this
obvious increase in profit and power.
Hamilton's Federalists quickly put through
legislation to charter the First Bank of The United States, as
a privately owned central bank on the Bank of England model. The
Bank would be issuing paper notes not really backed by metal,
but pretending to be redeemable in coinage, on the one condition
that not a lot of people asked for redemption. They really did
not have the coinage. The bank would do what they had blocked
the government from doing. Print paper money.
While gold and silver served as a smoke-screen
what the bankers really counted on, were the legal considerations
of the money. They knew that all that was needed to give their
paper notes value, was for the government to accept them in payment
for taxes. That, and not issuing too excessive a quantity of them.
Under those conditions, the paper notes they printed out of thin
air, would be a claim on any wealth existing in the society.
And we see why the Bank of North America
was not put forward for this purpose: the U.S. government had
owned 60% of it. . . . The government would only own 20% of the
Just where did the money for first Bank
of the U.S. came from? The $10 million share subscription for
the banks shares, was oversubscribed within 2 hours. Less than
1/10 of it was ever paid in gold. The rest of the payment was
accepted in the form of bonds - the very government bonds that
Hamilton had turned from pennies on the dollar to full value.
So you see where the money for the bank actually came from - from
the American people. That's how private central banking started
Thanks in large part to Jefferson's efforts,
the bank was liquidated in 1811. Three quarters of it was found
to be owned by Europeans - English and Dutch.
The 2nd Bank of the U.S. - the bank from
hell - operated illegally from inception, accepting IOU's instead
of the required gold in payment for its shares. So again the banker's
gold "requirement" turned out to be a masquerade.
This private central bank immediately
embarked on a wild monetary expansion. Beginning operations in
April 1817, by July it had 19 branch offices and had created $52
million in loans on its books and an additional 9 million in circulating
currency, based on gold and silver coin reserves of only $2.5
million. This tremendous expansion caused a wild speculative boom.
Then in August 1818, the bank turned abruptly and began an insane
contraction, causing the panic of 1819. It cut its outstanding
loans and advances from a high of $52 million, down to $12 million
in I819. Its circulating notes dropped from $10 million to $3.5
million in 1820. A massive wave of bankruptcies swept the nation.
The subsequent history of this bank and
its fight to the death with President Jackson reads like a financial
soap opera. The story of various state chartered banks is similar.
Meanwhile the US government acted responsibly
In the aftermath of liquidation of the first and second bank;
US Treasury notes were substituted in place of banknotes. About
$65 million were authorized and only $37 million actually issued.
The U.S. Treasury spent them into circulation. Initially they
were all large denomination, paid interest; were redeemable in
gold and required formalities to transfer. By 1815 they became
bearer certificates with no redemption date, paid no interest
and were in smaller denominations. Thus they were nearly a true
money form. The fact is that the US government has always acted
responsibly in creating money. Not so the private banks.
Greenbacks were on balance our best money
system to date Thanks to 100 years of misreporting, the image
of the greenbacks coming down to us is as inflated or worthless
paper money. In fact, $450 million were authorized and $450 million
were printed. Counterfeiters couldn't duplicate the Greenbacks.
Every Greenback was eventually exchangeable one for one with gold
But greenbacks were not promises to pay
money later - they were the money. Since they were not borrowed,
they did not give rise to interest payments and did not add to
any national debt. The U.S. Treasury printed them and spent them
Economists usually harp on the Greenbacks
dropping to 36 cents in gold, and they leave it at that. While
that happened, its highly misleading. . .
What did happen was that in June 1864,
Congress limited the amount of Greenbacks to $450 million.
There was inflation, but remember 13%
of the population was fighting a terrible war. 625,000 died. Greenbacks
performed well despite being spent on destruction. They were also
being abused by the bankers. For every greenback created by Congress,
the banking system created $1.49 in bank notes.
What if instead of being spent on destruction,
they went into building infrastructure, and canals and roads?
Spending such money on infrastructure need not be inflationary.
For example the Erie Canal lowered freight prices from $114 a
ton down to $9 a ton.
The great lesson of greenbacks is that
in times of crisis - and other times too - our nation has power
to do what is financially necessary, through our government. We
don't have to beg or borrow money from the wealthy and, create
an astronomical national debt. We don't have to tax the middle
class into oblivion, or cancel necessary programs. We can carefully
use the nations' sovereign money power far more than we presently
have been allowed to realize.
At the time of the greenbacks there were
those who fully understood. Senator Howe said: "We must rely
mainly upon a paper circulation; and . . . that the paper, whoever
issues it, must be irredeemable. All paper currencies have been
and ever will be irredeemable. It is a pleasant fiction to call
them redeemable. . . I would not expose that fiction only that
the great emergency which is upon us seems to me to render it
more than usually proper that the nation should begin to speak
the truth to itself; to have done with shams, and to deal with
The struggle between private versus public
control of money continued throughout the 19th century. The greenbacks
continued to constitute about a third of our money supply. Generally
the private money power dominated. But in periods when the government
exercised control, an excellent record was established- superior
to that of private control. The bankers continued their pretense
that gold was the basis of the system, and even the Federal Reserve
in 1913 appeared to be a gold-based system. But immediately upon
inception, we were pushed into warfare. Within 20 years Americas
farms, cities, exchanges and money system were all wrecked, ending
in the great depression. It was again left to our government to
rescue the nation.
It's forgotten today, but the Thomas Amendment
passed with legislation in 1933, gave the President the power
to create $3 billion in greenbacks if the banking system didn't
co-operate. . .
The de-funding of government at the local,
state and federal levels, arises out of this disease of attacking
government as the enemy.
This attack on government starts with
Adam Smith. His purpose in smearing the English government was
to keep the monetary power in the hands of the privately owned
Bank of England. . .
To summarize the argument: The nature
of the money power is societally derived, not one originating
in the activities of private corporations. Because of its great
importance to all, control over the process belongs under public
authority. Both logic and history show that its not safe to delegate
this power, and certainly not acceptable to allow its usurpation.
The current bailout
The demand for immediate action to avoid
a meltdown is misplaced. Immediate and wrong action will accelerate
the meltdown. There is only one thing Congress can do to inspire
confidence and avoid a meltdown - that is to take deliberate and
careful and good workable action to help resolve the crisis. In
other words to fulfill its congressional duty to America. . .
Getting it right means requiring several
conditions to protect the American people from the gang that's
been financially raping the nation; that gave us the unnecessary
Iraqi war. It means facing the facts on where the banking crisis
is and how it got there. It means examining the monetary and economic
reforms of the Federal Reserve System that will assure that such
thievery or foolishness won't happen again; and taking back from
those who improperly benefited from the tragedy and prosecuting
At the heart of the problem is that our
money system has been privatized. Naturally it's being run for
the benefit of the "privates" in control, with minimal
concern for the public interest. . .
Rather than borrowing the $700 billion
being demanded, and ending up paying back about 3 times that amount
after interest charges, The US government could issue the money
the same way the banks do, instead of borrowing it from them.
But while the banks issue credit that substitutes for money, the
U.S. would issue actual money. Our government has the power to
create the money, in an account, or by simply printing it as greenbacks.
There would not be inflationary effects,
because it was already believed that those moneys existed in the
form of the real estate values and loans. In effect this would
stop a deflation which would follow from writing down those assets
and loans to their present market values. Some conditions would
be needed to assure that the banking system did not use those
greenback dollars for further credit creation, as that would be
inflationary. In essence the greenbacks would not be "re-discountable"
by the banking system to create more loans, but would be legal
tender for all debts public and private. . .
What the administrations proposal is doing
is almost identical to what Keynes did during the Great Depression.
He insisted that the bailout be in terms of government going into
more debt to the banking system, whereas the Chicago Plan by the
greatest economists in the nation at that time, was promoting
the government to create money (greenback equivalents) instead
of debt. . .
Keynes won the argument but his program
did not work and it was only WW2 and [with] wartime employment,
creating tanks to be blown up, airplanes to be shot out of the
sky, and ships to be sunk, that Americans went back to work and
we worked our way out of the depression, and into more debt. That's
where this proposal leads. Keynes answer was that "in the
long run we are all dead," but not our posterity. Based on
what happened following his program before, our descendants, and
society that survives become enslaved.
Unless monetary reform is in the mix now,
it could take a tremendous worsening of the situation to come
up again soon. One articulate friend, George Romero, summed it
up for me: "The private sector has failed. The public sector
is expected to rescue them, and it will. Therefore the public
sector should be in control of the money system to benefit the
The Chicago Plan of the 1930s
Henry Simons from the University of Chicago
created the proposal and prominent economists from other universities
joined him in what became known as the "Chicago Plan."Economists
like Paul Douglas of the U of C.; Frank Graham and Charles Whittlesley
of Princeton; Irving Fisher of Yale; Earl Hamilton of Duke; and
Willford King of NYU, to name a few. One version was sent to all
the academic economists - about a thousand total. Of those responding,
235 from 157 universities agreed with the proposal; another 40
approved it with reservations and only 45 disapproved. So the
plan had broad professional support. Variants of the Chicago Plan
usually started by condemning the banking structure as foolish
and harmful: "If the purpose of money and credit were to
discourage the exchange of goods and services, to destroy periodically
the wealth produced, to frustrate and trip those who save, our
present monetary system (does that) most effectively!"
They dispensed with the gold standard
as not a real standard, because the value of gold had changed
violently up and down against commodities. From 1914 to 1917 wholesale
prices rose 65% and, then increased another 55% to May 1920, So
Gold coins lost over 75 % of their value against wholesale prices
in the Fed's first six years. Then by June 1921wholesale prices
fell 56% against gold. "Hard money" advocates who believe
that gold money has been stable should study these facts. One
version of the plan quoted Roosevelt's referring to gold as an
"old fetish of so-called international bankers."
The main features of the Chicago Plan
- Only the government would create money.
The Federal Reserve banks would be nationalized, but not the individual
member banks. The power to create money was to be removed from
private banks by abolishing fractional reserves - the mechanism
through which the banking system creates money. So the plan called
for 100% reserves on checking accounts which simply meant banks
would be warehousing and transferring the money and charging fees
for their services.
- The Plan separated the loan-making function,
which can belong in private banks, from the money-creation function,
which belongs in government. Lending was still to be a private
banking function, but by lending deposited long-term savings money,
not created credits. In this way they'd restrict an unstable practice
known as borrowing short and lending long - making long term loans
with short term deposits.
- The proposal recognized the distinction
between money and credit, which had been confused through fractional
reserves and what was called the "real bills doctrine."
The confusion was seen as one of the causes of the depression,
because when businesses reduced their borrowings on commercial
bills which occurs during any downturn, parts of the money supply
had been automatically liquidated. The Chicago Plan saw the instability
of this - that it aggravates a downturn.
Simon made this grand observation: "The
mistake. . . lies in fearing money and trusting debt. Money itself
is highly amenable to democratic, legislative control, for no
community wants a markedly appreciating or depreciating currency.
. . but money is not easily manageable alongside a mass of private
debt and private near-moneys. . . or alongside a mountain of public
Some variations of the plan had the U.S.
government lending banks all or part of newly printed cash needed
to achieve 100% reserves. This was a crucial part of the plan,
because depositors were going to the banks and withdrawing their
accounts, deflating the system.
This loaning of reserves feature also
elegantly converted all the previously monetized bank credits
into real US money on which the banks paid interest to our government.
It post facto made them intermediaries, earning some reasonable
spread for their loaning work.
Paul Douglas wrote: "This proposal
will of course be opposed by the bankers from whom it takes the
lucrative privilege of creating purchasing power. It would however
insure the safety of deposits, give large revenues to the government,
provide complete social control over monetary matters and prevent
abnormal fluctuations in the capital market. At the same time
it would permit the allocation of productive resources. . . to
remain primarily in private hands. All in all it seems the most
promising program for the reform of our monetary and credit system.
. . "
Marinner Eccles, who became Fed Chairman
under Roosevelt, testified that the best course would be for the
government to nationalize the Federal Reserve banks.
Congressman Jerry Voorhis made the case
for hundred percent reserves and putting money into circulation
by paying pensions and disabled persons. As late as 1945 Voorhis
introduced legislation for a U.S. Monetary Authority as our sole
creator of money.
Maurice Allais, the great French economist,
backed the plan and published a book on it in 1948.
Irving Fisher of Yale, wrote on it extensively
and popularly well into the 1940s. . .
There was no understanding or support
for the proposal among the electorate. Only Irving Fisher seems
to have understood the necessity for popularizing the matter.
Simons himself got cold feet and shied
away from promoting the plan, desiring to remain on a level of
professorial discussion. He even threw a wet towel on Fisher who
was promoting the reform suggesting that Fisher avoid popularizing
The Plan was mishandled politically. .
. The last attempt at 100% reserves was when Senator Nye of North
Dakota tried to place it in part of the administration's 1935
banking reform legislation, but his amendment was defeated.
The FDR administration had its own banking
reform bill and remained ambiguous on the Chicago Plan, never
commenting on it even though the political climate and professional
support for the plan was sufficient to get it passed, had they
made some effort. Instead his Treasury Secretary Morganthau was
trying to make minor adjustments without fundamentally challenging
the banking system. . .
Can we learn from what John Maynard Keynes
was doing during all this? He was squarely behind the bankers
and against such real reform. Yet he knew that he had to break
out of orthodox economics or the whole system was in danger of
being overturned. Keynesianism was a way to allow banks not government
to keep control over the money-creation process, and while the
more narrow minded economists fought Roosevelt's attempts to create
money and jobs as inflationary, during the nations worst deflation,
Keynes knew better.
The New York Times in December 1933. .
. got Keynes to write an open letter to Roosevelt, which they
published. Keynes wisely advised Roosevelt that "Only the
expenditures of public authority" could turn the tide of
depression. . .
However, Keynes inappropriately warned
Roosevelt not to create the money for this, but only to borrow
it, and wrongly advised him that there was already enough money
in circulation, and that: "increasing the quantity of money.
. . is like trying to get fat by buying a larger belt."
Keynes was therefore not "revolutionary"
except in relation to the utter backwardness of the financial
establishment. He didn't come close to a real solution, but essentially
protected his class. The real question has always been whether
the nation's money should be created under law, by government,
or under the private caprice of bankers.
Dealing with the National Debt
Bob Blain, Progressive Review, 1994 - From 1790 to 1993, taxpayers
were charged $3.2 trillion in interest on federal debt. . . .
The original debt at 5.53 percent interest compounded for 204
years equals $4.4 trillion. The present federal debt is arguably
the original debt enlarged by 204 years of compounding interest.
According to the Federal Reserve Bulletin,
the total money supply (currency, travelers checks, demand deposits,
and savings accounts) in the U.S. economy in March 1993 was $4
trillion. The total debt of the federal government, state and
local governments, corporations, farmers, home buyers, and consumers
was in excess of $15 trillion. If the total money supply is $4
trillion, where is the other $11 trillion of borrowed money?
Here is another curious fact. We have
been told for years that government borrowing to cover hundreds
of billions of dollars of deficits would drive interest rates
through the roof. Instead, interest rates have fallen dramatically.
In March, 1993 they were between 4.9 and 2.2 percent, far below
what they were in the early 1980s when federal debt was a small
fraction of what it is now.
The explanation for these anomalies is
that the missing money never existed. We never borrowed it, in
the normal sense that it was turned over to us and spent. Most
debt is not the result of people borrowing money; it is the result
of people not being able to repay what they owed at some earlier
time. Instead of declaring them bankrupt, creditors just add more
to their debt.
The federal government has been adding
interest to its debt for 204 years. James Jackson, Congressman
from Georgia, predicted that this would happen in a speech he
made to the First Congress on February 9, 1790. Jackson warned
that passing Alexander Hamilton's plan to base the country's money
supply on the existing federal debt of $75 million would "settle
upon our posterity a burden which they can neither bear nor relieve
themselves from." He predicted: "In the course of a
single century it would be multiplied to an extent we dare not
think of," He clearly saw that Hamilton's plan would put
in place an exponential process of debt growth. To support his
warning he cited the experience of Florence, Genoa, Venice, Spain,
France, and England.
Hamilton's plan was for Congress to commit
the country to pay interest on the debt until the debt was paid.
In the meantime the debt certificates would circulate as money.
He argued that this would turn a $75 million debt into a $75 million
money supply. The problem was that interest payments would have
come out of the money supply. This would reduce the quantity of
money that remained in circulation -- and cause recession -- until
new loans returned the interest money back into circulation. The
history of federal government finance shows such periodic swings
between debt reduction and recession to debt increase and recovery.
The power to deal with this problem that
Congress has neglected all these years is the power "to coin
money and regulate the value thereof." It has overused its
power "to borrow money on the credit of the United States."
According to the Federal Reserve, 98 percent of the U.S. money
supply is borrowed. Only 2 percent is coined.
The First Congress set the wrong precedent.
It should have created $75 million in money and paid off the debt.
With a population of 4 million people and an economy starved for
a medium of exchange, that would have increased the money supply
by $18.75 per person.
Why did the First Congress borrow instead
of coin money? Newspapers at the time accused members of Congress
of acting to serve their own interests. They sent agents into
the countryside to buy up debt certificates that the general public
thought were worthless. They then passed the Funding Act knowing
that it would give themselves and their heirs a source of income
that would grow exponentially with the debt. For every debtor
there is a creditor. What is a $4 trillion debt for debtors is
$4 trillion in claims for creditors.
To get out of this trap Congress has a
range of options:
First, it could stop paying interest on
the debt. Interest is the fuel that is exploding the debt. Cut
off the fuel; stop the explosion. Since 1790 over $3 trillion
in interest has been added to the original $75 million. Cutting
interest would immediately cut the annual deficit by about $300
billion. Experience shows that all other conventional actions,
no matter how painful, do no more than slow slightly the rate
of debt growth. Then Congress could begin the process of paying
off the debt.
A political problem with stopping the
payment of interest is that people with money control politics.
And many of them would have their interest income stopped. Insurance
companies and pension funds are invested in federal debt and foreign
holders would also be upset. Economically, however, we cannot
continue to add compounding interest to existing debt. The biggest
debtor is not the federal government. It is business corporations.
It is impossible for them to increase the physical production
of goods and services in order to keep up with exponential debt
growth that is limited by nothing but arithmetic. Unlike the debt,
the physical economy has limits.
The question holders of federal debt must
ask themselves is this: Do we want to insist on more interest
that will add debt to existing debt until the only option is debt
repudiation and we lose everything? Or are we willing to stop
where we are while we may still be able to recover our original
investment plus a reasonable profit?
A second option is for Congress to create
the money necessary to fund public works. As a sovereign government,
Congress' power is unique. It can create money debt-free and interest-free.
Congress needs to stop thinking of itself as the same as other
organizations that must take money in before they can spend it.
Money does not grow on trees. It must be created. The only choice
is whether to have it created as loans at interest from private
banks or to have it created by Congress debt-free and interest-free.
How can Congress create money without
causing inflation? Congress must regulate its value. The power
to create money includes this regulatory power.
A good way for Congress to regulate the
value of money is by funding projects at the current national
price level. The current national price level can be calculated
by dividing the most recent gross domestic product by the number
of hours of work that produced it. For example, in 1991 the total
gross domestic product was $5.6 trillion. The employed labor force
produced it with 237 billion hours of work. So the GDP was produced
at the rate of $23.95 per hour of work. By now the price level
per hour is probably $25.00. So let Congress fund projects at
$25 per hour. How this amount is allocated among labor, land,
and capital can be negotiated.
How much money should Congress create?
How about enough to reach full employment? We have about 9.5 million
people actively looking for work. That includes a million managers
and professionals; two and a quarter million technical, sales,
and clerical people; a million and a quarter precision production,
craft and repair people; over two million operators, fabricators
and laborers; and 305,000 framers, foresters and fishermen. That's
a skilled labor force as big as many nations -- all now idle.
Employed at an average $25 per hour, ($50,000 per year), they
would add $475 billion to the nation's gross domestic product
and reduce spending for unemployment compensation. The pie would
grow as unemployment went down. Congress could start by creating,
say, $50 billion, or $200 per person, in debt-free interest-free
money, then fund $50 billion worth of works projects, monitor
the results, and make adjustments as needed. Meanwhile the Fed
could raise bank reserve rates, not interest rates, to make checking
accounts more secure.
A third more conservative option is being
proposed by an organization called Sovereignty, which believes
that a country that borrows money loses its sovereignty to its
creditors. Their proposal is intended to restore U.S. sovereignty
by reducing our dependence on borrowed money.
The Guernsey experience. . .
Guernsey is an island state located among
the British Channel Islands about 75 miles south of Great Britain.
In 1816 its sea walls were crumbling, its roads were muddy and
only 4 1/2 feet wide. Guernsey's debt was 19,000 pounds. The island's
annual income was 3,000 pounds of which 2,400 had to be used to
pay interest on its debt. Not surprisingly, people were leaving
Guernsey and there was little employment.
Then the government created and loaned
new, interest-free state notes worth 6,000 pounds. Some 4,000
pounds were used to start the repairs of the sea walls. In 1820,
another 4,500 pounds was issued, again interest-free. In 1821,
another 10,000; 1824, 5,000; 1826, 20,000. By 1837, 50,000 pounds
had been issued interest free for the primary use of projects
like sea walls, roads, the marketplace, churches, and colleges.
This sum more than doubled the island's money supply during this
thirteen year period, but there was no inflation. In the year
1914, as the British restricted the expansion of their money supply
due to World War I, the people of Guernsey commenced to issue
another 142,000 pounds over the next four years and never looked
back. By 1958, over 542,000 pounds had been issued, all without
In 1990 there was $13 million in interest-free
state issued notes. A visitor to the island that year later wrote:
"I returned from Guernsey last weekend.
It is a fascinating little island. There are about 60,000 permanent
residents on the island. The average family owns 3.3 cars, their
unemployment rate is zero and their standard of living is very
high. There is no public debt. There is a surplus of public funds
which earn interest. The Guernsey Treasury increased the Ml of
the island by 40 percent in the last three-year period, and this
increase did not do anything to inflation. The price for a gallon
of gasoline in England translates to about $5US whereas, the price
in Guernsey is about $2US. Contrary to the teachings of current
economics in all higher institutions, inflation is not related
to the volume of money but rather to the size of the commercial
Sovereignty proposes that Congress create
money and lend it interest-free on a per capita formula to tax-supported
bodies for capital projects and to convert existing debt to non-interest-bearing
debt. Since first proposed in January 1989, the Sovereignty loan
plan has been endorsed by over 1,814 city, town, and county governments
and school boards, as well as by the U.S. conference of Mayors,
the Michigan state legislature and the Community Bankers Association
of Illinois, which represents 515 banks.
As loans, the money would be repaid, so
money injected into communities would fund projects, then be removed.
Of the three methods for putting money into circulation available
to Congress, giving, paying, and lending, lending is the most
Benjamin Franklin attributed the economic
success of the colonies to their creation of all the money they
needed. He said that the root cause of the Revolution was the
act of Parliament that prohibited the colonies from continuing
to issue their own money. The moneylenders of England thought
it more profitable that the colonies borrow their money.
We hear from Washington that we need to
sacrifice to bring the deficits under control -- cut consumption,
save, and invest. When that slows the economy, we will be told
to spend more to stimulate the economy. We have heard it all before.
Neither method works. We need debt-free interest-free money to
fund the work that needs to be done. It's not sacrifice we need;
it's productive employment. Let Congress use its unique power
to coin money and regulate its value to fund that employment.
Money is no more than an accounting device,
a system of notes certifying that the bearer has done a share
of the work and deserves a share of the wealth. Money's backing
is the goods and services produced by the labor force. By creating
money Congress can activate the idle productive power of our people.
And what they produce will add real wealth to the U.S. Treasury
and add nothing to the federal debt.
Sam Smith's Great American Political Repair
Manual, 1997 - A report of Guernsey's States Office in June 1946
notes that island leaders frequently commented that these public
works could not have been carried out without the issues, that
they had been accomplished without interest costs, and that as
a result "the influx of visitors was increased, commerce
was stimulated, and the prosperity of the Island vastly improved."
By 1943, nearly a half million pounds worth of notes belonged
to the public and was so valued that much of it was being hoarded
in people's homes, awaiting the island's liberation from the Germans.
About the same time that Guernsey started to fix its sea walls
the town of Glasgow, Scotland, borrowed 60,000 pounds to build
a fruit market. The Guernsey sea walls were repaid in ten years,
the fruit market loan took 139. In the first part of the the 20th
century, Glasgow paid over a quarter million pounds in interest
alone on this ancient project.
How did Guernsey avoid the fiscal disaster
that conventional economics prescribed for it? First and foremost
by understanding that when you build roads or sea walls or colleges
or houses, you are not reducing your society's wealth. In fact,
if you do it right, you are creating something that will add to
its wealth. The money that was created was simply backed by public
works rather than gold or "full faith and credit." It
was, in fact, based on something more solid than the dollar bills
in our wallets today. In contrast, tacking on an interest charge
to public works -- as we do in the US -- creates no new wealth,
but merely transfers claims on existing wealth from debtors to